• Expenses deductible over several years – borrowing, depreciation, capital works

    The following expenses for your rental property may be deducted over a number of income years:

    Borrowing expenses

    You can claim a deduction for borrowing expenses associated with purchasing your property, such as loan establishment fees, title search fees, and costs of preparing and filing mortgage documents. (Interest on the loan is not a borrowing expense, and can be claimed immediately.)

    If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less.

    If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.

    What can you claim?

    You can claim all of the following as borrowing expenses:

    • stamp duty charged on the mortgage
    • loan establishment fees
    • title search fees charged by your lender
    • costs (including solicitors' fees) for preparing and filing mortgage documents
    • mortgage broker fees
    • fees for a valuation required for loan approval
    • lender's mortgage insurance, which is insurance taken out by the lender and billed to you.

    What are you unable to claim?

    You cannot claim any of the following as borrowing expenses:

    • stamp duty charged by your state/territory government on the transfer (purchase) of the property title
    • legal expenses including solicitors' fees for the purchase of the property (these are capital expenses)
    • stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
    • insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
    • borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).

    Stamp duty and legal expenses may be included in calculating the 'cost base' of the property for capital gains tax (CGT) purposes as they are capital expenses.

    If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.

    If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.

    On 3 July 2010, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:

    • $800 stamp duty on the mortgage      
    • $500 loan establishment fees
    • $300 valuation fees required for loan.

    Peter also paid $1,200 stamp duty on the transfer of the property title. He cannot claim a tax deduction for this expense but it will form part of the ‘cost base’ of the property for capital gains tax (CGT) purposes when he sells the property.

    As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He would work out the borrowing expense deduction for the first year as follows:

    2010–11 (363 days)

    Borrowing expenses

    x

    Number of relevant days in year
    number of days in 5 years

    =

    deduction for year

    $1,600

    x

    363
    1,826

    =

    $318 deduction on his 2011 tax return

    The borrowing expense deductions for each other year would be worked out as follows:

    Borrowing expenses remaining

    x

    Number of relevant days in year
    remaining number of days in 5 years

    =

    deduction for year

     2011–12 (year 2 – leap year)

    $1,282
    (that is, $1,600 – $318)

    x

    366
    1,463

    =

    $320 deduction on his 2012 tax return

     2012–13 (year 3)

    $962
    (that is, $1,282 – $320)

    x

    365
    1,097

    =

    $321 on his 2013 tax return

     2013–14 (year 4)

    $641
    (that is, $962 – $321)

    x

    365
      732

    =

    $320 deduction on his 2014 tax return

     2014–15 (year 5)

    $321
    (that is, $641 – $320)

    x

    365
      367

    =

    $319 deduction on his 2015 tax return

     2015–16 (year 6)

    $2
    (that is, $321 – $319)

    x

    2
       2

    =

    $2 deduction on his 2016 tax return

     

    End of example

    Duration 3m5s. A transcript of Claiming mortgage and interest expenses for your rental property is also available.

    Depreciating assets

    You can claim a deduction for the decline in value of certain items, known as depreciating assets, that you acquired as part of the purchase of your property or that you subsequently purchased for your property.

    A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of depreciating assets are freestanding furniture, stoves, washing machines and television sets.

    The decline in value of a depreciating asset starts when you first use it, or install it ready for use. This is known as the depreciating asset's start time. For example, if you purchased an asset on 1 January (and used it only for a taxable purpose), you can claim half of the first income year's decline in value.

    Your deduction is reduced to the extent your use of the asset is for other than a taxable purpose.

    For assets costing $300 or less, you can claim an immediate deduction for the entire cost (to the extent you use it for a taxable purpose). You can't do this if the asset is one of a set of assets that together cost more than $300 – for example, if you buy four dining chairs each costing $250, you can't treat them as separate assets to claim an immediate deduction.

    To work out the decline in value of a depreciating asset, you need to know its effective life – that is, how many years you can use it for a taxable purpose. For most depreciating assets, you can work out the effective life yourself, or use an effective life determined by us.

    To work out your deduction for depreciation, use either the:

    • prime cost method – this means the value of the depreciating asset decreases uniformly over its effective life, or
    • diminishing cost method – this means the decline in value each year is a constant proportion of the remaining value; so it diminishes over time.

    To save on paperwork, depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.

    You can work it out using the Decline in value calculator.

    See also:

    Duration 2m:26s. A transcript of Claiming repairs and maintenance for your rental property is also available.

    Capital works expenditure

    Deductions for construction expenditure (capital works deductions) on residential rental properties are generally spread over a period of 40 years.

    You can claim a deduction if construction began after:

    • 17 July 1985 and the property is used for residential accommodation or to produce income
    • 19 July 1982 and the property is not used for residential accommodation (for example, a shop), or
    • 21 August 1979, the property is used to provide short-term accommodation for travellers and it meets certain other criteria.

    A deduction may also be available for structural improvements made to parts of the property other than the building if work began after 26 February 1992. Examples include sealed driveways, fences and retaining walls.

    The deduction is at the rate of 2.5% or 4% (adjusted for part-year claims) depending on the date the capital works began. Your total capital works deductions can't exceed the construction expenditure. No deduction is available until construction is complete.

    Deductions for construction expenditure apply to capital works such as:

    • a building or an extension – for example, adding a room, garage, patio or pergola
    • alterations – such as removing or adding an internal wall
    • structural improvements – such as adding a gazebo, carport, sealed driveway, retaining wall or fence.

    You can only claim deductions for the period in which the property is rented or is available for rent.

    If you have claimed, or could have claimed, a capital works deduction for construction expenditure:

    • you can't claim the same amount as a deduction for decline in value of a depreciating asset, and
    • the amount must be excluded from the cost base of the asset.

    See also:

    Repairs on a newly-acquired rental property

    Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions.

    Replacing capital equipment

    If you have to replace something identifiable as a separate item of capital equipment (such as a complete fence or building, a stove, kitchen cupboards or a refrigerator), you may be able to claim the cost as a capital works deduction or a deduction for decline in value.

    Example

    Janet has owned and rented out a residential property since 12 January 1983. Recently she replaced the old kitchen fixtures, including the cupboards and appliances. The old cupboards had deteriorated through water damage and wear and tear.

    The kitchen cupboards are separately identifiable capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can claim:

    • a capital works deduction for the construction cost of this work  
    • a deduction for the decline in value of the kitchen appliances.

    This is the case regardless of whether or not any of the following apply:

    • new fittings are of a similar size, design and quality as the originals:  
    • new cupboards are made from a modern equivalent of the material used in the originals
    • layout and design of the new kitchen may be substantially the same as the original.
    End of example
    Last modified: 01 Nov 2016QC 23636